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My very simple understanding of this is no and the $99,000 would be a total loss and there are no tax benefits to soften the blow.

Sure, there is a tax benefit. You're effectively deducting that $99,000 loss from your income, although we don't actually express it that way.

Picture it like this: When you put money into the 401k, you deferred all taxes (we'll ignore the question of after-tax contributions, if your plan even permits them) until the day you withdrew it.

But it turns out that your $100,000 investment is only worth $1,000.

On the day you withdraw your money, you pay taxes on $1,000. You never paid taxes at all on the other $99,000. This is the same thing as saying you were taxed on your total contribution-- $100,000-- and immediately deducted your loss of $99,000.

If you did this in a taxable account, your $100,000 would be taxed as you earned it; when you realize your $99,000 loss, you'd use that loss to offset the taxes on $99,000...effectively paying you back for most of the taxes on the $100,000 investment (although there are limits on how one can write off a capital loss against income).

So, you do effectively get a deduction by realizing a captial loss in a 401k, although we don't actually express it that way.

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